Tencent’s WeBank finds sweet spot in micro loans

Seven months after its launch, Tencent-backed (00700.HK) WeBank is showing off some of its first financial accomplishments that hint at the direction it may take as it carves out a place in China’s banking sector.

The numbers reveal that the bank, the first to launch under a private-sector pilot program by Beijing, is setting its sights on providing credit to small businesses and consumers.

The tack looks like a direct challenge to traditional credit card issuers, and could ultimately provide consumers with yet another payment option in both the online and offline worlds.

Tencent’s initial focus on this kind of credit isn’t difficult to understand, since Beijing has placed numerous restrictions on what exactly WeBank can do, following its launch in January.

At least at the outset, WeBank and rival banks being set up by Alibaba (BABA.US) and others won’t be allowed to accept deposits, which will limit their availability of funds to lend out.

They are also being forbidden from opening branches, which again limits their ability to meet customers and evaluate borrowers’ creditworthiness.

Lastly, they are being encouraged to focus on the small and medium-sized private business sector, which is traditionally underserved by big state-run banks.

The large number of restrictions have been carefully chosen to prevent these aggressive new banks from competing with traditional lenders, nearly all of which are state-owned and not very well run.

Against that backdrop, Tencent has chosen micro-lending as its first major business area, and is saying it has extended 800 million yuan (US$130 million) in such loans over the past two months.

All the activity occurred on Tencent’s popular QQ social networking (SNS) platform, where users could apply for up to 200,000 yuan in credit without any collateral or other guarantee.

Reflecting the big risk associated with such lending, Tencent is charging a relatively high interest rate of 0.05 percent per day.

A simple multiplication of that rate by 365 days in a year means borrowers would have to pay a relatively high annual rate of 18.25 percent.

The actual figure would be even higher due to the compounding factor.

Tencent didn’t say how many people had taken out loans or the average size of such loans, except to say “hundreds of thousands” of subscribers had used the program.

Putting user data to work

Tencent, Alibaba and other licensees under the new pilot program aren’t completely without resources to evaluate their new borrowers, since all have vast supplies of data that include users’ buying and other habits.

Still, the very high interest rates indicate the big risk involved when lending to this kind of borrower.

Those rates also show that Tencent may want to use the product in a similar way to traditional credit cards, which also carry high rates and usually see borrowers repay debt in installments and over relatively short periods of time.

The fact that WeBank is rolling one of its leading inaugural products on QQ indicates it’s aiming at consumers initially rather than businesses, since the platform is famous for its huge base of millions of young users, mostly under 20.

But I would expect that once it feels comfortable with the model, we could see it quickly extend the service to its more popular WeChat mobile messaging service, whose more than 500 million subscribers include a far more diversified group in terms of age and type of users.

At the end of the day, US$130 million is a tiny sum for a company of Tencent’s size, though it’s also already more than a quarter of WeBanks’ previously announced initial registered capital of 3 billion yuan (US$480 million).

That’s not a bad figure for just two months of lending.

I would expect the figure to continue growing quickly, as the company builds up a base of borrowers among both small businesses and consumers, and poses a challenge to traditional credit cards and credit lines.

Bottom line: Tencent WeBank’s rapid growth over the last two months shows it intends to focus on high-interest small loans aimed at consumers and small businesses, challenging credit cards and credit lines from traditional banks.

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